Home / State News / Detroit bond rating downgraded after not making payments

Detroit bond rating downgraded after not making payments

Posted by Tribune News Services on September 30th, 2013

DETROIT — Fitch Ratings Monday downgraded Detroit’s bond rating after the city opted not to make payments on its general obligation bonds.

The move, which was expected, underscores how difficult it will be for Detroit to regain Wall Street’s trust following the city’s Chapter 9 bankruptcy. A lower bond rating may increase the city’s borrowing costs.

Detroit emergency manager Kevyn Orr directed the city to stop making payments on its unsecured bonds after the city filed for bankruptcy on July 18.

Fitch’s move to downgrade Detroit from C to D comes as the city approaches an Oct. 1 deadline to make interest payments on $411 million in unlimited tax general obligation bonds and $202.8 million in limited-tax general obligation bonds.

Detroit already stopped making payments on its $1.5 billion in pension obligation certificates of participation, although the city continues to make payments on interest-rate “swaps” that are currently being treated as secured obligations in court.

The ratings agency said its move came after the city’s “publicly announced intention to default on the scheduled interest payments on limited and unlimited tax general obligation bonds.”

The market is watching closely to see whether Orr’s effort to treat general obligation bonds as traditional unsecured claims sets a precedent for the treatment of those bonds in court.

The city is seeking to borrow up to $350 million to pay off its pension debt swaps and reinvest in city services.

Some analysts have suggested that a recent uptick in interest rates for Michigan municipal bonds reflects investors who are skittish about doing business in Michigan because of Gov. Rick Snyder’s decision to back Orr’s plan.

But Oakland County said Detroit’s bankruptcy had no effect on its $350 million bond deal last week, the second largest in state history.